Stock Of The Day: Will Johnson & Johnson Rally? The Sell-Off May Have Ended

Shares of Johnson & Johnson (NYSE:JNJ) are trading higher on Wednesday. Yesterday, they were down more than 7.5%.  Analysts attribute the move lower to the company's announcement that its pending acquisition of Intra-Cellular Therapies, Inc. (NASDAQ:ITCI) will dilute its earnings.

But the sell-off may have ended, and there is a good chance Johnson & Johnson rallies. This is why our team of trading experts has made it our Stock of the Day.

You can see on the chart below that the selloff ended when the shares reached the $153 level. This wasn't a coincidence. This price level was resistance in November. Price levels that had been resistance converting into support is a frequent occurrence in the financial markets.

It is due to investor and trader psychology.

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Some people who sold Johnson & Johnson around $153.00 thought they made a good decision to sell when the price trended lower after. But when the resistance was broken in February, many of these unhappy sellers second-guessed themselves.

Some believed their decision to sell was a mistake and vowed to return their shares. But they would only do so if they could eventually get them at the same price they were sold for.

As a result, when the shares fell to around $153 yesterday, these formerly happy sellers entered the market as buyers. There were so many of them that it put a floor beneath the price. It created support at the same price that had been resistance.

Johnson & Johnson may reverse and move higher.

Some of the buyers who formed this support may become concerned that they will be outbid. They may think there are others who would be willing to pay higher prices than they will, and they know that these are the sellers who will go to them.

Because of this, they increase their bid prices to get ahead of other buyers. Other concerned buyers could see this, and raise their bid prices to get ahead of others as well.

This dynamic could result in a bidding war that forces Johnson & Johnson into an uptrend.

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